The U.S. Potato Chip Market: A Competitive Profile

Abstract

This paper follows the footsteps of ten studies that have tried to analyze the competitive profile of U.S. consumer markets: Men’s Shaving Gel, Beer, Shampoo, Shredded/Grated Cheese, Refrigerated Orange Juice, Men’s Razor-Blades, Women’s Razor-Blades, Toothpaste, Canned Soup, and Coffee.

Porter associates high market share with cost leadership strategy which is based on the idea of competing on a price that is lower than that of the competition. However, customer-perceived quality—not low cost—should be the underpinning of competitive strategy, because it is far more vital to long-term competitive position and profitability than any other factor. So, a superior alternative is to offer better quality vs. the competition.

In most consumer markets a business seeking market share leadership should try to serve the middle class by competing in the mid-price segment; and offering quality better than that of the competition: at a price somewhat higher, to signify an image of quality, and to ensure that the strategy is both profitable and sustainable in the long run.

Quality, however, is a complex concept consumers generally find difficult to understand. So, they often use relative price, and a brand’s reputation, as a symbol of quality.

In 2008 the U.S. retail sales for the Potato Chip market were $3.07 Billion. The pack sizes varied from 0.8oz to 50oz, with the 9-13oz packs being the most popular with a 33% share. So, we have focused cluster analysis on this size.

In 2008 the U.S. Potato Chip market was highly competitive—notwithstanding the dominance of Pepsi Co.’s Lay’s brand family—with a total of 254 brands.

Using Hierarchical Cluster Analysis, we tested two hypotheses: (1) That the market leader is likely to compete in the mid-price segment, and that (2) Its unit price is likely to be higher than that of the nearest competition. Employing U.S. retail sales data for 2008 and 2007 we found that the results supported Hypothesis I; both the market leader Lay’s Plain Potato Chip brand--and the runner-up Pringles Original Potato Chip brand--were members of the mid-price segment. However, while the unit price of the market leader was somewhat higher than that of the runner-up for 2008—as we have hypothesized--this was not the case for 2007, although the price difference between the two brands did not seem statistically significant.

We found that relative price was a strategic variable, as hypothesized.

We also discovered four strategic groups in the industry.

This is the eleventh in the study of U.S. consumer markets we have cited above. In eight of these—that exclude Men’s and Women’s Razor-Blades, and Ground Coffee—a pattern has emerged. In all eight cases the market leader was a member of the mid-price segment, as we have hypothesized.

Finally, in the words of Dirk Burhans, the author of Crunch, it is important to realize that a “potato chip could be such a subtle, delicate experience”.